Moody's Investors Service, a rating arm of Moody's Corporation (MCO - Free Report) , affirmed the senior unsecured rating of Baa2 and P-2 short term rating of Fidelity National Information Services (FIS - Free Report) , following the announcement of acquisition of Worldpay in a stock-cash deal worth $43 billion. The outlook was left unchanged at stable.
The ratings agency feels that the acquisition would create a strong business profile for FIS via increasing scale and expanding global distribution reach. Also, Worldpay might help to leverage FIS' strong referral network of banks, which provides potential new merchant customers. Together, the companies are likely to achieve the targeted revenue growth rate for 2019.
Boost in transaction and payment volumes, along with the pooling of investments for new payment technologies, online and mobile services, data analytic, risk, and security solutions are expected to improve operating leverage post-merger and in turn drive profitability of the combined company.
The acquisition is likely to keep adjusted debt to EBITDA ratio high in comparison to FIS’ current rating. However, the ratio is expected to decline in a span of 18 months. Per Moody’s, FIS’ ability to de-lever to the targeted range was witnessed in the past, for instance, at the time of the SunGard acquisition.
Further, Moody’s feels that de-leveraging shall receive support from free cash flow growth expected for the combined company in 2020. Also, Moody's is of opinion that FIS will generate high single-digit adjusted annual profit growth over three years, following the completion of the deal. Though management is targeting revenue and cost synergies of $500 million and $400 million, respectively, Moody's expects modest earnings growth from these synergies through 2021, considering the expenses involved in achieving these benefits.
Notably, the outlook was left stable as Moody’s believes that FIS will be able to repay debt and deliver high-single digit annual EBITDA growth. Moody's expects FIS' operating performance to remain stable over the intermediate term, given its highly recurring revenue model, long-term customer contracts and consistent adoption of digital payment solutions.
The ratings agency feels that FIS’ ratings have scope of upgradation if it successfully integrates Worldpay and is able to keep adjusted debt to EBITDA near 2x in the long term. Also, the agency is of the opinion that the company should keep generating organic revenue and profitability growth in at least mid-single digits.
However, the ratings could be downgraded if revenue and profitability decline or adjusted debt to EBITDA exceeds 3x on other than a temporary basis.
The company's shares have gained 9% over the past three months compared with 22.2% growth recorded by the industry.
Zacks Rank & Other Stocks to Consider
Fidelity National flaunts a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
A couple of other top-ranked stocks from the same space include Global Payments (GPN - Free Report) and New York Community Bancorp, Inc. (NYCB - Free Report) . Both these stocks currently carry a Zacks Rank #2 (Buy).
Global Payments’ estimates for 2019 have been marginally revised upward over the past 30 days. Its shares have gained more than 5% over the past six months.
In the past 60 days, New York Community has witnessed upward estimate revisions of 1.3% for earnings for the current year. The stock has surged around 11.2% in the past six months.
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